Q2 2024 Dynatrace Inc Earnings Call
Greetings and welcome.
Welcome to the diner traces fiscal second quarter 2024 earnings call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I'll now turn the conference over to Noel Paris, Vice President of Investor Relations Ms. Furnish you may begin.
Good morning, and thank you for joining <unk> second quarter fiscal 2024 earnings Conference call. Joining me today are Rick Mcconnell, Chief Executive Officer, and Jim Benson Chief Financial Officer.
Before we get started please note that today's comments include forward looking statements such as statements regarding revenue earnings guidance and economic conditions actual results may differ materially from our expectations due to a number of risks and uncertainties discussed in <unk> SEC filings, including.
Our most recent quarterly report on Form 10-Q, we filed earlier today.
The forward looking statements contained in this call represent the company's views on November 2nd 2023.
We assume no obligation to update these statements as a result of new information future events or circumstances.
Unless otherwise noted the growth rates, we discuss today are non-GAAP, reflecting constant currency growth and per share amounts are on a diluted basis.
We will also discuss other non-GAAP financial measures on today's call to see reconciliations between non-GAAP and GAAP measures. Please refer to today's earnings press release, and supplemental presentation, which are both posted in the financial results section of our IR website.
And with that let me turn the call over to our Chief Executive Officer, Rick Mcconnell.
Thanks, Noel and good morning, everyone. Thank you for joining us for today's call.
We had an outstanding quarter exceeding the high end of our guidance across all metrics.
Our our grew 24% year over year in constant currency.
Subscription revenue increased 26% year over year in constant currency.
non-GAAP operating income increased to $106 million or 30% of revenue.
And we delivered a 25% free cash flow margin on a trailing 12 month basis, including a four point impact for cash taxes.
These results continue to highlight the increasing criticality of observed ability and application security and the significant value our platform provides to our customers.
They also demonstrate the strength and resilience of our business model, resulting in a balanced combination of topline growth and profitability as well as our ability to execute consistently in a challenging macro environment.
Jim will share more details about our future performance and increased fiscal 'twenty 'twenty four guidance in a moment in the meantime.
I'd like to review my perspective of the observable in the market.
Areas of strategic go to market investment and our ongoing focus on innovation.
Let me start with what I'm hearing from customers.
We just wrapped up our annual Diamond trace innovate series.
We want to know about 1200 customers prospects and partners in person to our events in Sao Paolo Sydney in Barcelona.
These events add tremendous value in terms of exchanging ideas highlighting the value of our latest innovations and building long term relationships. They also provide me with the opportunity to have one on one conversations with key decision makers about the topics that are critical to their businesses.
A few themes stood out across these events.
First observe ability and application security are critical not only to customers' digital transformation journeys, but also a key element to business transformation and how they win in their respective markets.
The CIO of a major Asia Pacific Bank told me that they expect to differentiate on the quality of their software and user experience and further that Danya trace is a core part of their strategy to achieve this business outcome.
Second.
Large enterprises continue to outgrow their DIY open source and competitive dashboard and monitoring tools seeking instead, a much more dynamic fully unified Absorbability Blackwell.
They want a solution that leverages all data types traces metrics logs really user data et cetera.
With the analytics and context to come from a unified data store rather than a common user interface that requires a lot of extra effort to leverage.
They come to dine at Tres to gain efficiencies through our AI and automation capabilities to proactively resolve issues before they result in costly outage.
The CIO of a large Canadian financial customer told me that he wants to leverage diner trace to move to the next level of software liability and performance.
He believes that diamond trades will enable better prediction of user impacting issues and in so doing improve business results.
And perhaps an even more clear articulation of the value of the diner trace provides our customers when it comes to identifying and resolving issues proactively.
It's been the CTO major bank in India.
What he told me it was quote we sleep because you don't.
And third vendor consolidation and standardization across their organizations are key priorities observe.
Observe ability decisions that have previously been made at the department or even application level, especially in large complex enterprises are increasingly centralize it.
Signage raise helps eliminate siloed tools radically improve software availability and performance reduce cost and increase organizational productivity.
This enables our customers teams to focus on innovation and growth rather than break fix and maintenance.
I had a customer from a global 50 technology Company tell me based on a very broad deployment of diner trace that our platform is match.
Providing insights into their software performance, but they couldn't reproduce otherwise with multiple alternative tools.
As a result of these market dynamics and the accelerated merging a business and technology objectives and strategies customers are prioritizing observed ability spec.
And our unified platform AI leadership and automation.
Or the three principal differentiator is enabling them to derive maximum value from these investments with diner trace.
This leads me to three strategic areas of increased go to market investment for the second half of our fiscal year to promote future topline growth.
First we continue to evolve and expand our partner focus, especially with the worlds most preeminent global system integrators and Hyperscale.
To start aircrafts base aligns directly with out of the G S thoughts given.
Given the complexity of cloud deployments and that's broad based digital transformation projects Absorbability has moved from optional to mandatory.
And our GSI partners have broadly selected diner trace as their absorbability platform of choice for such initiatives.
In addition to our existing relationships with Deloitte Mdx C yesterday, Kindle and diner traits together announced a global strategic Alliance, which has already resulted in numerous six and seven figure wins there.
This agreement Leverages kindles experience as the world's largest I T infrastructure services provider.
Given our shared focus on AI ops will enhance our joint cloud and application modernization offerings.
We are additionally, pleased to announce the evolution of our partnership with Accenture.
This expanded engagement brings together the value of the diner traced platform with Accenture is global professional services capabilities and cloud modernization delivery experience.
Together, we can enable customers to accelerate their digital transformation and modernization journeys with and and observe ability and application security.
With respect to Hyperscale or this past quarter, we extended our footprint with new cloud regions in Sao Paulo, Sydney and Zurich.
Additionally, we announced an expanded go to market partnership with Microsoft as well as the planned availability of Grail natively on Azure or early deployments by the end of this calendar year.
A second area go to market expansion is our plan to accelerate the addition of sales capacity in the second half of our fiscal year.
While we are not currently capacity constrained, we believe incremental resources near term can contribute meaningfully to growth in fiscal 2020 five and beyond.
And third we plan to add various targeted marketing investments to drive top of funnel pipeline.
While we expect the current macro conditions to persist through the end of our fiscal year, we plan to increase spend levels prudently to enable incremental share gains in the future.
Importantly, we plan to make these additional investments within the envelope of our guidance that Jim will cover in more detail.
I'd like to share a few customer wins, this past quarter that or less of our go to market evolution.
A major E Commerce company realized that some potential customers were unable to add products to their online shopping cart, resulting in millions of dollars of lost revenue.
<unk> identified the root cause of the issue during a P O C leading to a seven figure competitive win.
A large government agency expanded their existing relationship with diner trace after realizing a unified analytics platform can save them more than $4 million over five years.
The agency originally chose diner trace due to our highly automated approach and the maturity of our AI capabilities.
One sign of trace was in place they realize they could identify potential problems before they occur allowing them to resolve issues before they result in costly outages.
And a leading financial services company was struggling with tool sprawl spiraling cost for logs and unanticipated overages from other vendors.
Benefiting from the predictability and flexibility of the new diner trace platform subscription or D. P. S agreement the customer signed a seven figure multi year deal.
Within a day of instruments, one of their key apps dayni traits identified the source of a problem they had been struggling with for months.
I Love these depictions of the value that we deliver.
But we don't for one moment take these perspectives for granted and we are committed to earning our customer support each day in a rapidly evolving technology landscape.
Next I'd like to turn to our relentless focus on market, leading innovation that drives our entire organization is one of our core values.
This is especially evident in the continuous stream of new capabilities that enhanced our platform.
Beginning with AI, our customers have benefited from Davis for more than a decade.
Last quarter I shared are plans to add a third critical element to our existing Davis I architecture.
Generally they like capability named Davis co pilot.
I'm happy to share that we are on track with our development efforts to deliver early previews by the end of the calendar year and general availability in early calendar 2024.
Of course, many organizations and announce strategies around generative AI.
Our approach however, it goes far beyond simply adding a natural language interface that relies on human intelligence to steer Gen AI queries.
Diamond trade, let's say I will combine predictive causal and generative AI techniques with each one excelling in specific capabilities.
For example, David predictive and causal AI will be comprehensive and precise prompts to Davis co pilot.
Davis co pilot will in turn create queries dashboards and suggested code for automation workflows.
This enables customers to avoid outages or performance degradations before they happen and help remediate and resolve active incidents when they arise.
We think of the convergence of these three AI techniques as hyper modal and that they will deliver incredible power individually and even more so together.
Hyper modal AI enables customers to advance their visibility in there I T ecosystem from infrastructure and apps all the way to end user experience.
Second October marked the first anniversary of several of the most significant innovations in our platform to date, including Grail.
As I've mentioned in the past.
Rail is a massively parallel processing index list data Lake House or data store that provides near real time analytics and insights into how our it environment is working.
Rail is available as a SaaS offering which comprises the majority of our customer deployments.
Essentially all of our AWS SaaS customers are now running on Grail.
And as I mentioned, our Grail deployment with Azure is slated to begin rollout by the end of this quarter.
Log management is a monetize them, we use case that leverages the power of Grail.
I was in the second quarter, we had 300 customers leveraging logs powered by Grail to help eliminate manual correlations between multiple tools alerts and data silos in addition to reducing cost.
A major U S car rental company added logs on rail to their existing deployment to gain visibility into business events that were causing delayed API responses and revenue impact.
They are using nearly 200 customer metrics across the enterprise with incident, alerting and auto remediation to proactively identify and resolve performance issues to grow their business.
Third we continue to innovate in application security.
Public headlines of security breaches and stolen credentials, along with the new SEC reporting requirements for cyber security incident disclosures.
Are helping elevate awareness for additional security coverage.
Leave that integrating real gouge bugging technology seamlessly into the Dynatrace platform will be very powerful for development teams, enabling them to extend left the value of absorbability for their organizations.
Before I turn the call over to Jim I'd like to highlight our inaugural global impact report.
Which is available on the Dynatrace websites.
We believe advancing R. E. S. G strategy is paramount to our success and our responsibility as a global company.
The report details progress related to Dynatrace as three ESG pillars sustaining the environment.
People culture, and community and governance and ethics.
As part of the report we disclosed our baseline greenhouse gas emissions data for the first time and providing aid expanded scope of data on diversity equity inclusion can be long.
We will continue to develop and implement programs that drive progress on our ESG initiatives and engage with our stakeholders as we expand our ESG roadmap.
In closing I'm very pleased with our queue to execution and believe we are well positioned to deliver strong results in the back half of that by 24.
A market for Observability, an application securities extremely large and growing.
Unified platform, a I leadership and automation differentiate us in the market and place us any position of strength relative dark competition.
And we plan to continue to manage our business prudently and invest strategically in those areas that we believe will enable us to extend our leadership position in the future.
Jim over to you.
Thank you Rick and good morning, everyone.
Q2, with another quarter of consistent execution by the Dynatrace team.
We delivered strong results in a dynamic environment.
Getting the high end of our guidance across all of our top line and profitability metrics.
The strong results were driven by the combination of high value New logo lands on the Dynatrace platform you ongoing expansion of existing customers.
Inherently efficient business model, allowing us to deliver it continued balance of growth and profitability.
Our ability to successfully navigate in a tight budgetary environment is a testament to the resilience of our value proposition our commitment to customer success and are incredible team.
Now, let's dive into the second quarter results in more detail.
And please note that the growth rates mentioned will be year over year and in constant currency unless otherwise stated.
Starting with annual recurring revenue or a R. R.
Total for the second quarter was $1.34 billion, an increase of $279 million year over year, representing 24% year over year growth.
Net new a R. R on a constant currency basis was $59 million in the quarter and exceeded our expectations and what is normally one of our seasonally lightest bookings quarters of the year.
This outperformance were driven by several notable seven figure competitive wins, an ongoing expansions in the customer base.
We added 160, new logos to the Dynatrace platform in queue to roughly.
Roughly consistent with the year ago quarter.
As a a shared in the past we are very focused on the quality of new logo lands that have a greater propensity to expand.
The average <unk> for a new logo land size continues to grow and was roughly $140000 on a trailing 12 month basis up 18% year over year.
As Rick outlined.
We continue to attract enterprise customers that are outgrowing their existing DIY or commercial tooling solutions and coming to dynatrace with a depth breadth and automation of our unified Observability platform.
Gross retention rate remained best in class in our industry in the mid nineties and contributed to a net retention rate of 114% in the second quarter in line with our expectations.
Absorbability remains a priority for our customers and we continue to see them expand with us all.
Albeit at a moderate pace as he moved more cautiously and an uncertain economy.
Customer platform adoption remains strong with 64% of our customers using three or more modules up from 55% of customers in the year ago quarter, and with an average <unk> over $500000.
Hedrick mentioned, we see growing customer interest in newer product offerings, including logs on grill and application security.
Track record of groundbreaking innovation will support expansion opportunities in our installed base with more meaningful Arif contribution from our latest product introductions expected and fiscal 25.
We also believe the new Dps pricing model is another area that will drive future expansion opportunities.
We're seeing traction with both new customers during the platform and existing customers like Duke energy and an Australian government agency, who prefer the flexibility and predictability of our Dts licensing model.
We are closed over 100 D. P. S deals globally. Since you became generally available in April of this year.
Total dps customers to over 250.
And while the role is still in the early stages. We believe D. P. S has the potential to drive meaningful accretion and net retention rate across most of our installed base in the future.
Moving onto revenue.
Total revenue for the second quarter was $352 million up 24% year over year.
Subscription revenue for the second quarter was $334 million up 26% year over year.
Both exceeded the high end of our guidance by $6 million driven by strong bookings linearity in the quarter.
With respect to margins non-GAAP gross margin for the second quarter was 85%.
Upper point from the prior quarter and up two points from Q2 of last year.
Or non-GAAP operating income for the second quarter was $106 million.
This is $13 million above the high end of our guidance range.
Roughly half of the over achievement was driven by the revenue upside in the quarter.
The other half were driven by gross margin improvement from ongoing cloud hosting efficiency efforts.
Prudent have one hiring and the timing of the workout acquisition closing.
This resulted in a non-GAAP operating margin of 30% exceeding the top end of the guidance range by 300 basis points.
non-GAAP net income was $93 million or 31 cents per diluted share.
This was four cents above the high end of our guidance range driven by the items I just highlighted.
Our free cash flow was $34 million in the second quarter <unk>.
<unk> mentioned in the past we believe it is best of your free cash flow over a trailing 12 month period due to the seasonality and variability in billings quarter to quarter.
When a trailing 12 month basis free cash flow was $330 million or 25% of revenue.
As a reminder, this includes 400 basis points of impact related to cash taxes pre.
Pre tax free cash flow on a trailing 12 month basis was 29% of revenue and up 32% year over year.
Finally, we ended the second quarter with a robust balance sheet, including $702 million of cash and zero debt.
Moving onto guidance, we are raising our full year guidance across all top line and profitability metrics to reflect the strength of our second quarter performance.
The health of our pipeline and our visibility into the back half of the fiscal year.
This increasing guidance includes incremental FX wind headwinds from a strengthening U S dollar.
Before I jump into the details there are a few items to keep in mind with respect to our guidance.
First the building blocks of growth for business for for the business continue to be new logos and net retention rate.
This guidance assumes new logo growth in the low single digits and a net retention rate of 112% to 113% for the second half of fiscal 2024.
Second or guidance assumes the net new a our contribution from new logos will approach, 40% with roughly 60% of net new a R. R.
From expansion activity. This mixed differs from our historical mix of roughly one third of our our growth from new logos in two thirds from expansion.
But given the robust new logo pipeline health and growing deal sizes. We believe the net new a R. R mix will be more waited to new logos than in the past.
Third.
Strengthening of the U S dollars since our last call creates a headwind relatively relative to our prior full year guidance incrementally. The foreign exchange headwind is roughly $16 million to a R. R and approximately $8 million revenue for the full year.
And with that let's start with our updated guidance for the full year with growth rates in constant currency.
We are raising our AOR guidance by roughly $3 million at the mid point to $148 billion to $1.49 billion <unk>.
Representing 19% to 20% growth year over year up 100 basis points from our prior guidance.
Guidance Reyes.
Represents an increase of approximately $19 million on a constant currency basis.
Given the strength of air or in the second quarter. We now expect the seasonality of net new a R to be similar to prior years with roughly 40% in the first half and 60% in the back half of fiscal 24.
Also similar to last year, we expect Q for net new era to be slightly higher than Q3.
On a constant currency basis.
We are raising our revenue guidance play approximately $7 million at the mid point.
To 1.409, and 141 $9 billion representing.
Representing 21% to 22% growth year over year.
100 basis points from our prior guidance.
This guidance Reyes represents an increase of roughly $15 million on a constant currency basis.
We are raising our subscription revenue guidance by approximately $6 million at the mid point to 13342134 $4 billion, representing 22% to 23% growth year over year up 100 basis points from a prior guidance.
<unk> represents an increase of roughly $14 million on a constant currency basis.
Turning to our bottom line the strength and resilience of our financial model is evident in our ongoing margin performance we.
We are committed to maintaining a balanced approach that optimizes cost to drive profitability.
Also investing in future growth opportunities that we believe will drive long term value.
We will continue to invest heavily in R&D innovation.
And as Rick mentioned, we plan to step up go to market investments in several areas GSI partnerships sales capacity and demand generation activities with.
With this in mind, we are still raising our full year non-GAAP operating margin guidance by 125 basis points to 27%.
An increase of $20 million at the mid point [noise].
We are raising non-GAAP EPS guidance.
[noise] Ah dollar nine to $1.12 per diluted share.
Representing an increase of six cents at the mid point of the range.
This non-GAAP EPS is based on a diluted share count of 300 to 301 million chairs and a non-GAAP effected cash tax rate of 19% consistent with prior guidance.
And finally, we are raising our free cash flow guidance to $313 million to $320 million, representing an increase of $9 million at the mid point and a free cash flow margin of 22% to 23% of revenue.
As a reminder, while we do not guide free cash flow quarterly due.
Due to the seasonality and variability in billings as well as the timing of cash tax payments, we expect free cash flow to be higher than our first and fourth quarters and significantly lower in our second and third quarters.
Looking at Q3.
We expect total revenues to be between 256, and $359 million or 19% to 20% growth.
Subscription revenue is expected to be between 337, and $340 million up 20% to 21% year over year.
From a profit standpoint, non-GAAP operating income is expected to be between 94 and $97 million or 26.5% to 27% of revenue.
And non-GAAP E. P. S is expected to be 27 to 28 cents per diluted share.
In summary, we are very pleased with our second quarter of fiscal twenty-four performance and we have a strong pipeline and good visibility to the remainder of the fiscal year.
We continue to take a prudent approach to our outlook given the ongoing volatility of the macro environment, but we remain optimistic about a long term growth opportunities and our ability to deliver balanced growth and profitability.
And with that we will open the line for questions operator.
Thank you.
At this time will be conducting a question session.
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One moment, please so we pull for questions.
Thank you and our first question is from the line of Matt Hedberg with RBC capital markets. Please proceed with your questions.
Great. Thanks, Thanks, Thanks team, great quarter, and we're gonna get a good job outlining all the product advanced extremely allowed to look forward to there.
What struck me in your comments.
You mentioned stepping up hiring the second half.
It sounded bullish to us given sort of like what you guys talked about on the call was unchanged macros out there I guess maybe to double click on on what gave you the confidence to reinvest in the business now.
Oh, Thanks Man I appreciate the comment.
What what we're seeing is very good visibility and pipeline into the second half, which obviously is increasing visibility for the second half relative to where we were last quarter. So that's a point number one and number two is is it at some stage macro what's gonna improve and obviously and putting in place salespeople. It takes some time.
To really get them ramp to value. So we wanted to start at at this age to be prepared for off by 25.
That sounds good maybe just one other quick one you know the spirit of unchanged macros.
Curious you guys aren't necessarily tied to consumption as much as others, but the curious what you saw on kind of a cloud optimization trends within your customer base I know, it's been an ongoing debate with hyperscalers, but curious what your customers are saying I'm I'm kind of the optimization.
Our view is that the optimization cycle continues the good news is with a subscription as opposed to directly consumption oriented business model, we have an opportunity to really.
Prevent the same degree of impact another C. In the optimization cycles. That's that's good I'd say, that's 0.1 0.2 from our perspective as we maintain mad over the last couple of calls is it we really see observability has in many ways, an antidote to optimization cycles by making her cloud upon.
That's actually more efficient so we continue to see that in in our new logo lands, which were very strong last quarter.
Thanks, a lot.
The next question is from the line of pendulum bar with J P. Morgan.
With your question.
Hey, Thank you so much I just wanted to double click on the Scranton and here are our performance this quarter or maybe maybe talk about wardrobe that was there any pushouts from Q1 that help you know anything to call out in terms of federal budget study, so anything that would help.
Thank you pendulum I'll take that.
So we had a really strong Q too and really where we continue to see we've actually this has been probably three or four quarters now in a row, where we continue to see <unk>.
Growing interest in Dynatrace on the new logo front with really high quality lands and so that trend has continued.
Or a pipeline as I mentioned in our prepared remarks for a new logos in the back half is also quite strong. So we had a really strong <unk>.
Second quarter for a new logo lands, which I think is a testament to the value proposition of the Dynatrace platform customers are all growing either DIY solutions or in several cases outgrowing competitive solutions that just just couldn't scale and so that was largely the draw.
River a pendulum.
As I mentioned before we're still seeing healthy expansions, we're just seeing expansion more moderated paces customers are more cautious given the macro environment.
Understood one for <unk>, the on logs and grill cost has been an issue in general.
Industry around plug analytics for customers what has been the customer feedback on pricing for load analytics on grill, and maybe touch on the pipeline for logs on green from the second half of this you are seeing any kind of impact from the recent acquisitions in the industry and kind of starting to help but listen to conversations if not the approaches.
Thanks to Angela on the on the pipeline, perhaps perhaps I'll cover that one first last quarter, we reported on the order of about 300, <unk> and logged on <unk>.
And as we sit here this quarter, we've got a few hundred or so paying real customers and the PSE pipeline has increased by about 20% over where we were last year. So we're seeing I would say very good penetration logged on Grail overall on the.
Pricing peace and our expectation is that while we do price more heavily in the analytics area than say in the ingest or storage area logs that on average, Oregon is still provide a discount to current market pricing from most other vendors. So we shouldn't be a good solution.
<unk> in the market from a pricing and cost standpoint as well.
Understood <unk>. Thank you.
Ah next questions from the line of Willpower with Bird. Please proceed with your question.
Okay, great. Thanks.
Rick maybe starting with you I'm just interested in some of your comments on your innovate meetings and a particular kind of what's your hearing with respect to customer demand around some of the hyper modal.
A I capabilities that that should work you don't expect to go G. A next year just wanted to kind of hear your perspective as to what customers are looking for their what's demand indicators.
You know look like on that Prime Minister, you're thinking about the monetization there.
H O L D. As a short form is it as customers understand our story. They they fully appreciate the notion that we deliver causal and predict an AI today and we got for over a decade and the fees are highly deterministic AI techniques. So they provide very precise.
This answers.
And intelligent automation from data already.
The genitalia.
Peace through Davis Copilot, then is incremental to essentially provide not only a natural language interface in the closet predict today I.
But to do so in an iterative way to make the whole greater than some of the parts.
So from the feedback and I got Sao Paolo Sydney Barcelona, the Internet sessions. We did there is a lot of talk around how to leverage dynatrace for all three AI techniques as we look to the future.
Okay, and any thoughts with respect to kind of the the monetization piece of that how that kind of falls into the equation.
We haven't finalized the monetization P as well, but we will do so over the coming quarter or so to sort out African Ah monetize generative AI and Davis copilot in particular, but nothing to report yet on that at this at this point.
Okay, and if I could just sneak in one maybe <unk> just thinking about you know not retention rates down a bit although I know you're expected alright, just did what kind of love to try to get a little additional cover it as to what's driving that is it is it you know fewer new new products expansions as a.
Wider usage you know we can renewals there's anything else you could you know the color there.
Well I'll start with I mean, our renewals remain really strong I mean, we've talked about that that are gross retention rate remains in the mid nineties. So the product is very very sticky. So it's certainly not a retention rate it as I outlined kind of in the prepared remarks that we their customers that continue to.
Prioritize observe ability.
But I would say customers continue to remain cautious and they're doing expansions and you know not every customer has the same some customers are prioritising, hey, I'm seeing growth in new workloads and I'm going to moderate maybe newer workloads it'd have absorbability until I have better line of sight into my own business.
And then there are cases, where you know customers are adding new work, though so it kind of varies it varies by customer it varies by industry, but I would say customers continue to Prioritise absorbability.
And you know until they get better visibility into their own environments, I think that kind of what we're seeing is probably.
Gonna remain consistent I will say as I said earlier that we are quite optimistic that we continue to see growing pipeline not just with new logos also expansions, but new logos in particular I think suggests that customers are starting to make observability architecture decisions and I think that's.
Net positive for Dynatrace, but I think we're well positioned in that space.
Thank you have a nice job with the results.
Thanks, well.
Our next question.
<unk> comes from the line of Ramo Lynch L with Barclays. Please proceed with your question.
Thank you actually.
Can I stay on that topic, and maybe we kind of upper level, it's a little bit I mean like look in tough times, usually if you're living in on the installed base.
New logo with the comedy and I'm a bit slower it's tougher to sign them Dear Uhm D. <unk> it seems to almost the <unk> how much of that is driven on the new logo side. The terms of people understanding your broader message you know there's a lot of competitors that got taken okay. Can I also get a lot of disruption in the market. So.
So, what's driving that and and and you obviously did a lot more work on on kind of.
Getting new logos started to work with Congress bedroom et cetera, like can you speak to them a little bit because that's kind of different than what you hear from anyone else.
Yeah, I'll take that so I wanted to be clear, we're continuing to see healthy growth with installed base customers. So.
I just wanted to make sure we're clear that we continue to see growth with installed base customers and in particular, we see customers that where our value proposition is really really strong which is large complex environments those customers.
Their expansion Richard Rolling it and even more increased pace and kind of the average for the company and on the new logo front. It's.
It's more customers are seeing pain points, they're seeing pain points with their either their existing solutions, which could be competitive solutions or existing tooling.
And it's cumbersome it when they're seeing outages, it's it's difficult to ascertain where it is and there's people chasing alerts that <unk>.
So I would say absorbability customers are making more and more architectural decisions and when they're making architectural decisions and they're evaluating vendors, especially in large complex environments, we score very well and so I think we're seeing a pipeline relative to that with with customers that are starting to make I would say.
Platform decisions, they make me platform decisions in different areas and they're making decisions on absorbability.
It's kind of a platform of durability, an application security. So I think we're well positioned and I think the sales organization is appropriately going after that opportunity and as I said for the last few quarters, we're focusing on the quality of the land more so than the number of new logos, because we find that the quality of land results in bed.
[noise] expansion you know longer term.
Yep perfect Yep, that's very clear and I know, it's tough with Cps to kind of going through the different parts, but what are you seeing in terms of you know we talked a little bit about logs locks on grey lipitor, but in terms of you kind of being able to be brought it into the a T. M in terms of getting infrastructure more logs inserted.
But when <unk> when you talk about the big architecture decisions.
That people are kind of understanding the fourth of the ability package that you guys are offering them kind of pulling that way or is it still what what are you seeing there on the more than your address where you'd like infrastructure. Thank you and congrats for me as well.
Thanks for your mouth, what what I would say on the D. B S run and in particular on on the penetration a multi modules is that a year or so ago, we were around 50% or so customer lands were at three plus modulus. That's now two thirds. So we continued.
See that Brian platform plank.
We certainly expect D. B S. B, a key component of that by facilitating expansion across the portfolio modules that we have or customers to utilize a broader array of <unk>.
So D. P. S really notice facility is multi module appointment and yes.
Okay perfect.
Thank you Congress.
Thank you very much.
The next question is from the line of a cash Roger with Goldman Sachs. Please proceed with your questions.
Thank you very much congrats <unk> applaud you on stepping up to go to market investments, particularly both times.
One for you one more of a financial question. What is when you look at the different initiatives to drive growth you've got a product initiatives Grill you got apps Security then you got the the partnerships with the the Hyperscalers S. I.
And the growth of the company is very solid and whatever you printed which means that the underlying core APM business is probably a little bit slower maybe maybe that will pick up in the macro clear so any thoughts on how the company's exposure to cook opportunities looks like as you come out of this this malaise could receive the underlying X road.
Exploration initiatives really start to come back to the forefront in the financial question is how do you measure return on investment, but it's investing our daughter and go to market research and development Uh Huh, what are the ways in which you quantify the attorney looking for <unk>. That's it for me. Thank you so much.
Well, let me take a crack at it and then we can kind of offer some some comments. So I think he's you said it well that we are there's there's multiple things. We're doing one we're continuing to continue to have probably the best portfolio of offerings in the absorbability application or application security space.
And we continue to make.
Make it better with logs on <unk> can you make it better with some of the enhancements, we're making on the application security side with one of the announcements will be made around security analytics within the quarter. So.
We're making investments UN.
Unified platform and within the unified platform, you can get a bunch of capabilities and so we're continuing to do that and we're a different phases cache of you know penetration whether it be some of the newer area of the application security logs.
Obviously doing well around Fullstack monitoring, we're doing well around other areas. So there's there's lots of product related areas for us continue to penetrate into the customer base brought in and introduce new logos. We're <unk>, we're continuing to make those investments and will continue to do so I think those will be a catalyst for growth to your.
Once kind of uneven macro conditions.
You know some side and on the go to market front, it's multiple things we continue to make investments in partnerships.
Did you see these and partnerships that we're talking to a G. S eyes, we mentioned that they take multiple years, but these are really critical G. S. I as in you know the announcement of Kindle. Another large one we've already one digits with Kindle, even before they were cheating partner, so that plus adding additional sales capacity.
Is really again going to be the calcium more products from our offers to sell you need more capacity, including leveraging your channel to be able to do that and then relative to <unk> definitely look at dollars.
Depends upon R&D versus go to market R&D, you're kind of looking at investment, you're making a different product areas and what you expect as far as incremental revenue over a period of time and then on the go to market side. We we definitely look at the demand environment in particular, the pipeline and where and when does it.
Makes sense to make investments and go to market based on certain productivity levels. So there's multiple levers that we're looking at and as Rick said, we think now is the time to maybe step up investments and we had we had indicated that earlier that we thought we'd be making a bit more go to market investments in the back half of the year and we're doing that and I think it.
It's a signal that we're seeing some growth in the pipeline, we're having very good visibility and as Rick said you know we're trying to make sure that when you make these investments. The return you get on these investments happening in the future and we wanted to make sure that we're position for fiscal twenty-five and beyond to capitalize on that.
I would simply add cash that we are extraordinarily disciplined is accompany N. R Y evaluation of incremental investments and when we look at logged on rail and the investments that we're making their apps and the investments we're making their any acquisitions that we look at Hopkins and the like all the way through the go to market investments with.
Suggested the yes, I partnerships hyperscaler engagements and partnerships sales force expansion in the second half aren't getting targeted marketing investments all within.
Guidance envelope. We provided are are very very disciplined in approach.
Thank you.
Our next question comes from the line of Keith Sparkman with BMO capital markets. Please proceed with your questions.
[noise] hi, many thanks, and alright, likewise had to but first solid resolved.
The first one is more of a macro question and many of the infrastructure software companies and indeed, the global S size as well suggested that.
Spending slow during the course of September quarter.
And I wanted to get your perspective on.
The Observability space to do do you think the the spending within the context of observers slowed and you guys outperform or did you not see that slowing reflected in the pipe or close rates are things along those lines.
Yeah, I'll take that keep that I would say, we really didn't see any change throughout the quarter to be honest that the quarter again, we had some strong new logo land that I mentioned, but we didn't see anything towards the tail end of the cord that suggested any change one thing I did mentioned in the <unk>.
She had really good linearity of this quarter right. You know that you know so our monthly linearity was really strong.
Actually one of the strongest that we've seen in so it didn't certainly didn't suggest that things kind of weekend in September.
Okay and then the second question on security.
And logs on analytics your previous suggested that you know sort of 100 million run right.
Exiting 25 or are you still on track for that and and Rick just to clarify I think you said the pipe for logs was up 20% year over year, but did you mean sequentially because yes, yes.
Yes, I said a year over year of teeth I meant sequentially up from last quarter I was speaking in compared to last quarter's 20 per cent increase in pse's quarter over quarter for logs and in addition to that 300 now paying customers and logged on <unk>.
And to answer the first question of are we still on track for 100 million in <unk> I ended up like twenty-five. The answer is yes, we're still tracking to that number and we saw that and how 'bout for logs continues same thing largely it said $100 million with an ache orders <unk> 100 million within 12.
Both.
Would put us at the end of FY twenty-five and we continue to track to those numbers.
Okay perfect. Many thanks.
Okay.
The next question is from the line of Andrew Lewinsky with Wells Fargo. Please proceed with your questions.
Great. Thank you congrats on a great quarter. So I wanted to start with a question on Microsoft's So I know you're expanding your partnership with them and you'll have grill on at the end of the year on as your so I'm wondering.
How are you thinking about the opportunity relative to some of your other go to market channels Uhm, particularly in F Y 25, given that.
Microsoft is talking about seeing an increase in AI workloads, which I would think with benefit dynatrace, given all pervasive or you have.
[noise] weaved into your platform and Davis co pilot.
Hey, Sandy S. Absolutely agree on generative AI, it will be a tailwind or our business and we look to the future and as more organizations employ generative AI. It isn't just to think about Davis co pilot. It is also to think about all the workloads that companies are gonna be deploying in generative AI.
That will dramatically increase compute and therefore, the need to provide observability. So absolutely that's a tailwind Microsoft obviously, it will be a court leader in that <unk>.
On the the Microsoft front, specifically very excited to chew through the course of the quarter began early rule out an uncompleted at the beginning of next calendar year with <unk>. So that is a that is a major step forward in advance.
And in addition to that we're very excited about the the acceleration to go to market partnership with Microsoft in particular, with Azure, as well, which which increases join talent.
Overall, I would simply say that.
He hyperscaler channel for US is a very important one which continues to grow nicely in terms of the overall transaction volume simply because that is a preferred purchase method of choice.
A large percentage of our customers.
That's very helpful. Thanks, Rick maybe one last follow up question you raise your physical 24 free cash flow outlook and I'm. Just wondering if you could talk about your thoughts on maybe the longterm free cash flow margin and where do you think it could go given that we're seeing some nice expansion here already.
Yeah, I'm not prepared to talk about longterm free cash flow margins I will tell you that we are kind of a rare class you know that one where we're probably the only or one of the very few companies in the infrastructure software space. It actually pays cash taxes because of our profitable and so are.
Pre tax free cash flow margins are in the high twenties. So it's very very healthy and so while I'm not prepared to tell you about what the longterm model is I think where I would say we are in a really good place and we will continue to make balanced investments that we think will kind of be focused on getting top line <unk>.
Both reacceleration, while continuing to deliver really really good operating margin am free cash flow margins.
Wonderful thanks, guys keep up the good work.
Thanks Sandy.
The next question is from the line of Mike Secos with me to accompany please proceed with your question.
Hey, guys. Thanks for taking the questions here I'd wanted to circle back on D. P. S for a second it kind of follows on from some of the the line of questioning that Rainbow head, but if I'm just looking at the the north of 250 G. P. S customers that you're citing today I know that.
Sweet that cohort of customers is growing versus the the earlier doctors were really some of your largest power users and I think in the prepared remarks. The management team also noted how.
D. P. S is expected to drive improved and over time.
Giving me the growing size of his customer base could you start providing us maybe a little bit color as far as what you see with respect to those spending trends coming from those customers as they come in a D. P S like.
Do we have enough of a of a size or scale here when thinking about that customer cohort to get a better sense of how that screams.
Translating into N or at this time.
It's a great question I would say that I think the cohort size is not big enough. Yet you know, while we're really happy with attraction there were getting on D. P. S. But to answer your question more directly about will we provide you more color. The answer is yes, we will provide you more color I just don't think.
It's difficult to make comments now to your earlier point a lot of the early adopters of D. T. S. When it was limited availability, where our largest customers. So the sample size is a bit skewed we want to make sure that we have.
A bit broader of a sample size, but just the general premise of D. T. S. One is good customer interest and to.
Just having a model where you can do a kind of an annual or a multiyear commit with a access to the platform with a consumption drawdown around all of our capabilities is just something that we think it's just a much more frictionless way of customers adopting our technology, which is why we're bullish about.
Being overall kind of expansion rate accreted, but will provide you information on that as we think that there is in a better information to.
Make no bra.
Broader comments versus a sample size that small.
Maybe just highlight the some of the comments and the prepared remarks say number one feedback on Dps from customers is extremely positive that gives us a much more flexibility over multiyear durations to using consumer platform.
The the the second pieces as as Janet sat earlier the expectation over the next few years is 80% to 90% of our customer base will be on D. P. S. This is definitely a preferred directional heading both for customers N N for us at that address.
Got it. Thank you. Thank you for the color and then and then I guess.
Kind of.
Kind of flows into the next question here, but I know what are the things that the management team cited for the <unk> performance was was competitive wins as well as expansions right and so I was hoping you could kind of unpack bed and I don't want to.
Lead you to an answer here, but like if you could if you could look at it in like three different categories like so the first is like.
Are you finding that your when rates are actually increasing and then the second is do you feel like diner treats was actually getting more looks or <unk> based on the expanded product announcements and maybe this more frictionless packaging with D. P. S.
And then the third.
Would you or.
Replacing or displacing some of these other competitive solutions.
Who are you seeing more commonly there any shift as far as that then bender consolidation that that is coming towards the D. J I I noticed a lot don't pack, but just wanted to make sure I'm I'm thinking about all these things appropriately.
I would say again I'd I'd start with you Gotta be you know, we're we're very optimistic and positive about what we've seen for kind of in particular, new logo wins and competitive wins, it's been multiple quarters, you know I would say for queue to you you had a lot in there.
I would say one the pipeline continues to grow for the reasons outlined which is customers are beginning to make absorbability architecture decisions and I think when they do that we certainly do get nip at because I think customers look at well, who the leaders in that space and we come to mind. So [noise], we fare very well when we get to the point of a P O.
<unk>.
So yeah. So I think we're getting some good at bats, I and I think that there is growing pipeline in that space and so it you know and as I said before that even the existing customers that we have they are continuing to expand I, just think that customers are being a bit cautious but.
We're optimistic it's reflected in our guide for the full year, which is why I provided a little bit of color that I thought that are waiting of net new era would maybe be a bit more waited to new logos.
Then we've seen historically call at 40% roughly new logos 60 per cent expansion versus a one third two third's and you know I think it's just continued good execution by the sales team and I think it speaks to the you know the importance of a unified platform for customers as they make these choices.
My God I would simply add that is to provide at a pizza and the data for you last four we add we had $10 million plus GCB wins for new logos and eight of those were competitive takeouts of our direct competitors.
So we we track when rates very very carefully and in in so doing we feel very very good about our when rates and competitive environment and our target market space in I B B S is contributing there as well.
Great to hear appreciate all the color and and congrats on the strong results here in the uncertain macro really stand out. Thank you.
Thanks, Mike.
Thank you.
Our final question will be from the line of <unk> with William Blair pushes your with your question.
Hey, Thanks for taking the questions and congrats on the the great results just wanted to follow up on the 300 customers that you reference for logged on Grill Uhm, what did an initial landing size doesn't look like for those deals and then are those deal still largely unknown expansion front or have you actually starting to see Grail drive any new logos to the platform.
Yeah, I I would say that again I think we've said this before but the the way it's gonna work with logs on grill and we're starting to see this is one many of those customers will do a P O C.
Yeah. It is Rick said you know the good news is we talked about 300, plus P. O C. As in the last quarter now we have 300 paying customers. This quarter. So we suggest you that those policies have been largely positive, but the way. It's gonna work as customers are going to try new workloads and they're gonna leveraged a product with new workloads.
And then they'll add more new workloads and then we think it'll get to the point where.
Depending upon the value that they're getting from the offering that they'll start to shift existing workloads. So the way. We view. This is they're gonna start small <unk> and they've got a ramp over time and our expectation is that the ramp we're gonna see as you'll see some ramp in the back half of the year.
You'll see a much bigger ramp up in fiscal twenty-five as they start doing more adoption.
Okay very helpful. And then could you give us some more color on the growth you're seeing that GSI segment and how big those practices are today from a dynatrace train a head count perspective, just compared to where they were two or three years ago. When you actually started that motion and when we think about partners like Kangaroo will accenture, Deloitte and D. S. C. What are some tangible.
Differences about those relationships versus some of the other G S as you're working with.
Thanks Shake the.
Partnerships succinctly, we're very very excited about each of them. They each have substantial runway an opportunity most of them we'd been working with as we reported I think last quarter. We have relationships now with really all 10 10 of the top 10, yes ice but.
But they keep escalating an import so as an example that I can't relationship has existed we talked about a reasonable number of 67.
Wins that we've had previously those those continue we'd escalated into a strategic partnership same thing with Accenture with with added unusual go to market investment on both sides. So very very excited about that the the G. S. Eyes are gonna have evolved over a longer period of time because the sauce.
Digital transformation initiatives are long so it's it's gonna take some time to gestate.
But we believe that it is a very very significant channel they could develop for us over time, it where leaned in to these partnerships in a meaningful way.
Great. Thanks for taking my questions and congrats again on the great results.
Thank you. Thank you let me let me go ahead and wrap up at this point. Thank you all for your engage questions. Your ongoing support we really do appreciate it where quite bullish about the opportunity that lies ahead, we look forward to connecting with you at upcoming and I are events over the coming weeks and we wish you all a very good day, thanks for joining.
Thank you.
Conclude today's conference disconnect your lines at this time and we thank you for your participation.